Automated trading system in an electronic trading exchange

ABSTRACT

An electronic exchange system network includes a trader site having an automated trading system capable of submitting orders to an exchange site. The automated trading system determines whether an order should be submitted based on, for example, the current market price of an option and theoretical buy and sell prices. The theoretical buy and sell prices are derived from, among other things, the current market price of the security underlying the option. A look-up table stores a range of theoretical buy and sell prices for a given range of current market price of the underlying security. Accordingly, as the price of the underlying security changes, a new theoretical price may be indexed in the look-up table, thereby avoiding calculations that would otherwise slow automated trading decisions. Other techniques may be used in addition or in the alternative to speed automatic decision-making. In addition, a system of checks may be conducted to ensure accurate and safe automated trading. The automated trading system may be capable of automatically submitting orders in connection with the underlying security in order to hedge part of the delta risk associated with the automated option trades.

The present application is a divisional of U.S. patent application Ser.No. 11/474,951 filed on Jun. 27, 2006, which is a divisional of U.S.patent application Ser. No. 09/417,774 filed on Oct. 14, 1999, nowissued as U.S. Pat. No. 7,251,629, all of which are hereby incorporatedby reference.

BACKGROUND OF THE INVENTION

1. Field of the Invention

The present invention relates to an automated trading system for use inan electronic trading exchange network system and, more particularly, atrading system that rapidly, accurately, and safely responds todesirable trading opportunities.

2. Description of the Related Art

Trading exchanges historically provided a location for buyers andsellers to meet to trade stocks, bonds, currencies, commodities, andother items. The New York Stock Exchange and the Chicago MercantileExchange are examples of such trading exchanges. Recent advances incomputer and communications technology have led to electronic tradingexchange system networks. Electronic trading exchange system networksuse communications networks and computers to replicate traditionalface-to-face exchange functions. For example, centralized exchangecomputers disseminate market information, maintain records andstatistics, settle cash payments, determine risk based marginrequirements, and match trades. Matching of trades is typically done ona first come-first served basis, whereby time of order entry is animportant criterion for determining priority in fulfillment of atransaction.

A communications network connects the exchange computers to numeroustrader sites. Each trader site includes one or more trader stationsoperated by traders. Exchange network operators typically provideexchange members with interface software and, in some cases, hardware toenable traders to view prices and other information relating toproducts, and to execute transactions by submitting orders and quotes.This trading information is displayed in a grid or other organizedformat. Market competition is fierce. Traders who can quickly identifyopportunities and act on them generate the largest profits.

Most trader stations in use today rely upon the traders themselves todecide whether to submit an order in response to a trading opportunitypresented through the exchange. In this regard, the trading informationis received from the exchange, processed, and displayed on a monitor ofthe trader's station. The trader reads the trading information from themonitor and decides whether or not to submit an order. The tradersubmits an order by entering instructions into the trader station usinga keyboard or mouse.

Attempts have been made to implement trading systems that automatedecision-making so that orders may be submitted with limited traderinteraction. These systems have a number of drawbacks. For example,user-friendly systems that automatically submit orders without traderinteraction, while faster than a human trader, are relatively slow interms of computer speed due to application and system design. In atypical set-up, trading information received from the exchange isprocessed by general purpose backend computer equipment. The backendcomputer may, among other things, (1) act as a gateway by communicatingto market information from the exchange to various types of clientequipment, (2) submit, delete, and modify orders and quotes to theexchange from the various client equipment, (3) receive real-time tradeconfirmations and end-of-day back office reports, and (4) perform riskanalysis, position management, and accounting functions. The traderstations are clients of the backend computer. The trader stations may betasked with numerous functions, such as (1) receiving and displayingreal-time market information, (2) creating and displaying theoreticalprices related to market products, (3) composing, submitting, modifying,and deleting orders and quotes, (4) maintaining positions andcalculating risk management, to name a few. Each trader station istypically configured in a very user-friendly, Windows-based environmentsince the trader will spend long periods of time each day watching andinteracting with it. The overhead associated with the functionsperformed by the backend computer and the trader stations reduces theresponse speed of automated trading.

In addition, computer equipment lacks the trading judgment of a humantrader. A computer can generate staggering losses in the blink of an eyeby submitting orders based upon incomplete or mistaken assumptionsinherent in the trading program, erroneous input data, or corrupted datarelied upon by the trading program. Accordingly, there exists a need inthe art for an automated trading system that rapidly responds to tradeinformation transmitted from an exchange, yet is safe and accurate.

SUMMARY OF THE INVENTION

The present invention has been made in view of the above circumstancesand has as an object to provide an improved trading system that rapidlyresponds to trading information received from an exchange.

A further object of the invention is to provide an automated tradingsystem in an electronic trading exchange system that rapidly submitsorders in response to trading information received from the exchange.

A further object of the invention is to provide an automated tradingsystem that ensures the accuracy of automatic trading operations.

A further object of the invention is to provide an automated tradingsystem that performs automatic trading operations without the risk ofenormous losses due to erroneous, mistaken and/or repeated operation.

A further object of the invention is to provide a trading system in anautomated trader to station that may be remotely controlled.

A further object of the invention is to provide an automated tradersystem that automatically hedges some or all of the delta riskassociated with the execution of a trade by submitting an order inconnection with another, related trade opportunity.

Additional objects and advantages of the invention will be set forth inpart in the description that follows, and in part will be obvious fromthe description, or may be learned by practice of the invention. Theobjects and advantages of the invention will be realized and attained bymeans of the elements and combinations particularly pointed out in theappended claims.

To achieve the objects and in accordance with the purpose of theinvention, as embodied and broadly described herein, the inventioncomprises an automated trading system for use in an electronic exchangesystem network that includes a receiver interface that receives marketprice information for a first traded item from an exchange, datareference logic that outputs a transaction value for the first tradeditem from a data structure based on price information for a secondtraded item related to the first traded item, decision logic using atleast a portion of the received market price information and thetransaction value to generate a decision whether to submit an order forthe first traded item, and an output interface for outputting a requestfor market transaction for one of the first traded item and the secondtraded item for transmission to the exchange in response to the decisionlogic. By way of example, the first traded item may correspond to anoption and the second traded item may correspond to a securityunderlying the option.

The data reference logic may receive current price information for thesecond traded item and uses the current price information to output thetransaction value. The data reference logic may include memory storingthe data structure, which maps pre-calculated transaction values of thefirst traded item over a range of price values of the second tradeditem, and reference logic for identifying one of the pre-calculatedtransaction values based at least in part on a current price value forthe second traded item. The data structure may comprise one or more of atwo-dimensional data structure mapping pre-calculated transaction valuesof the first traded item over a range of prices of the second tradeditem, an n-dimensional data structure, where n is 3 or more, a look-uptable, a linked list, and/or a tree structure.

The decision logic may compare at least a portion of the received marketprice information to the transaction value when automated trading in thefirst item first becomes enabled. The automated trading system may alsoinclude safety check logic, responsive to the decision logic, to preventtransmission of a request for market transaction (or to cap the maximumquantity of the market transaction) for the first traded item to theexchange if the request does not meet a predetermined criterion, such asa maximum trade quantity for the first traded item or a maximum numberof market transaction attempts within a predetermined period of time.The decision logic may compare at least a portion of the received marketprice information to the transaction value when the maximum number ofattempts is increased.

The receiver interface may receive the market price information for thefirst traded item indirectly from the exchange via an exchangeinterface. Further, the decision logic may compare the transactionalvalue to at least a portion of the received market price information,where the transaction value is a minimum sell price for the first tradeditem, and the market price information includes a market bid price forthe first traded item. The transaction value may be a maximum buy pricefor the first traded item, and the market price information may includea market ask price for the first traded item. The transactional valuemay be a theoretical value of the first traded item based on amathematical model.

The price information for the second traded item may correspond to acurrent market price for the second traded item. The decision logic maythen generate a comparison when the current market price for the secondtraded item changes. Comparisons may additionally be generated when thecurrent market price for the first traded item changes, when a tablevariable are updated or changed, when automated trading is enabled,and/or when safety checks are relaxed.

A backend computer may include the receiver interface, the datareference logic, the decision logic, and the output interface. The firstbackend computer may operate using a Windows-based operating system or atext-based operating system. A trader station separate from the backendcomputer may be coupled to the backend computer through a communicationlink. The trader station may include a graphic user interface to enablea trader to monitor the operation of the backend computer. The traderstation may transmit updated data reference information for updating thedata reference logic to the backend computer over the communicationlink. For example, the trader station can calculate the updated datareference information, which the backend computer stores. The backendcomputer may be located substantially closer than the trader station tothe exchange that transmits the market price information for the firsttraded item.

The present invention further comprises an automated trading method foruse in an electronic exchange system network, that includes receivingmarket price information for a first traded item, identifying a desiredprice for the first traded item in a look-up table based on priceinformation for a second traded item related to the first traded item,comparing the received market price information for the first tradeditem to the desired price for the first traded item, and generating anorder for one of the first traded item and the second traded item basedon the comparison of the received market price information to thedesired price.

The first traded item may correspond to an option and the second tradeditem may correspond to a security underlying the option. The step ofidentifying a desired price may include receiving current market priceinformation for the second traded item, using that current market priceinformation to index a desired price for the first traded item in thelook-up table. The look-up table may be a two-dimensional tableproviding desired price values indexed by item traded and price of thesecond traded item or an n-dimensional table, where n is 3 or more.

The present invention further comprises an automated method of tradingin an electronic exchange system network, comprising the steps ofreceiving a current market price for an option from an electronicexchange, comparing the current market price for the option with adesired price for the option, where the desired price is derived fromcurrent price information for an underlying security for the option, andsubmitting an order for the option to the electronic exchange within 1millisecond of the step of receiving the current market price.

The step of submitting an order may be performed within 600 microsecondsof the step of receiving the current market price, and even within 380or 250 microseconds of the step of receiving the current market price.

The present invention further comprises an automated trading method foruse in an electronic exchange system network, including the steps ofreceiving market information for a first traded item, identifying atransaction value for the first traded item in a look-up table based onat least one of price information for a second traded item related tothe first traded item and received market information for the firsttraded value, and using at least the identified transaction value indetermining whether to submit an order for the first traded item.

The identified transaction value may be an implied volatility valuecorresponding to the first traded item, a maximum buy value for thefirst traded item, a minimum sell value for the first traded item, or atheoretical value for the first traded item generated based on amathematical model. Further, the look-up table may comprise a linkedlist.

The backend computer may perform the receiving, identifying, and usingsteps on a Windows-based operating system or on a text-based platform. Atrader station separate from the backend computer may calculatestransaction values for storage in the look-up table and transmit thecalculated transaction values to the backend computer, which stores thecalculated transaction values in the look-up table. The values stored inthe look-up table of the backend computer may be checked against valuesstored in a look-up table in the trader station to confirm the accuracyof the look-up table stored in the backend computer.

Moreover, the method may further include submitting an order for thefirst traded item receiving confirmation of a transaction from anexchange responsive to the order submitted, and submitting an order forthe second traded item to hedge a delta risk associated with theconfirmed transaction.

It is to be understood that both the foregoing general description andthe following detailed description are exemplary and explanatory onlyand are not restrictive of the invention, as claimed.

BRIEF DESCRIPTION OF THE DRAWINGS

The accompanying drawings, which are incorporated in and constitute apart of this specification, illustrate embodiment(s) of the inventionand together with the description, serve to explain the principles ofthe invention.

FIG. 1 illustrates an embodiment of an electronic trading exchangesystem network in accordance with the present invention.

FIG. 2 illustrates a further embodiment of an electronic trading systemnetwork in accordance with the present invention.

FIG. 3 provides a schematic of the functionality of an embodiment of anautomated trading system in accordance with the present invention.

FIGS. 4 and 4A, collectively referred to in the description of thepreferred embodiment as FIG. 4, illustrate a representation of anembodiment of a theoretical price look-up table in accordance with thepresent invention, with FIG. 4A being a continuation of the right end ofFIG. 4.

FIG. 5A, 5B, 5C and 5D, collectively referred to in the description ofthe preferred embodiment as FIG. 5, illustrate an embodiment of atrading screen for use in connection with a trader station in accordancewith the present invention, with FIG. 5A being the upper left quadrant,FIG. 5B being the upper right quadrant, FIG. 5C being the lower rightquadrant, and FIG. 5D being the lower left quadrant of FIG. 5.

FIG. 6 provides a flow diagram of the steps performed in automatedtrading in accordance with the present invention.

FIG. 7 illustrates a further embodiment of an electronic exchange systemnetwork in accordance with the present invention.

DESCRIPTION OF THE PREFERRED EMBODIMENT

The present invention recognizes that electronic trading exchange systemcomputers match buy and sell orders on a first come/first serve basis.Accordingly, the speed and accuracy of submitting orders or otherresponses is critical to the trader's ability to participate in the mostprofitable transactions. Even short delays in response may freeze atrader out of an otherwise lucrative transaction.

The present invention is capable of reducing the time it takes for thetrader to submit an order in response to incoming trading informationfrom the exchange. In accordance with one aspect of the presentinvention, the trader's computer equipment automatically decides whetheror not to submit an order based upon a look-up table of tradinginformation stored by the computer equipment and trading informationreceived from the exchange computers. The look-up table, among otheradvantages, eliminates the need to recalculate decision information whentrading conditions change. Recalculating decision information is timeconsuming, particularly when trading conditions change frequently. Forexample, calculating a single price for an option can take severalhundred microseconds to a few milliseconds and each underlying securitymay correspond to several hundred options. In addition, information inthe look-up table can be structured to enable automated decisions to bemade for select traded items sooner than for other traded items. Tofurther enhance the response speed of the trader, the trader's computerequipment may be dedicated or substantially dedicated to performingautomated trading operations, with limited or minimized overheadpermitted for other tasks. Further, the trader's computer equipmentassigned to automated trading may be used to process raw tradinginformation received from the exchange. The present invention is furthercapable of reducing the time delay associated with the transfer oftrading information from the exchange computers to the trader.

In an additional aspect of the present invention, safe and accurateautomated trading may be achieved by performing various checks of theinformation used in decision-making and/or information concerning theorder. Further, an automated hedging feature may be invoked which, whena trader takes a position in a security, automatically establishes ahedge position in a related security.

Reference will now be made in detail to the present exemplaryembodiment(s) of the invention illustrated in the accompanying drawings.Wherever possible, the same reference numbers will be used throughoutthe drawings to refer to the same or like parts.

FIG. 1 provides a schematic of an embodiment of an electronic tradingexchange system network 10 that may be used in connection with thepresent invention. Other network arrangements may be used as well. Theelectronic trading exchange system network 10 includes an exchange site100 and a plurality of trading sites 200. For purposes ofsimplification, FIG. 1 illustrates an exchange site 100 linked to asingle trading site 200. Other trading sites 200 may be located in adifferent part of the same city, as the exchange site 100, a differentcity, a different country or different continent as the exchange site100. The exchange site 100 need not be limited to equipment provided ata single location, but may be provided in multiple locations linked by anetwork. Similarly, the trading sites 200 need not be limited toequipment provided at a single location, but may include equipment atmultiple locations linked by a network, such as a wide area network(WAN).

The exchange site 100 may be linked to the trading site 200 by one ormore communication links 300. The communication links 300 may be part ofa wide area network formed by dedicated communications lines,commonly-accessible communication lines, or a combination thereof. Forexample, dedicated lines may be strung between the exchange site 100 andone or more of the member trading sites 200. Alternatively, dedicatedlines may be leased from telephone, cable, or other communicationnetwork operators. For example, the public switched telephone networkmay embody the commonly-accessible communication lines. Of course, thecommunications links 300 may also include, in whole or in part, wirelesscommunications, such as microwave or satellite links.

In one embodiment, the exchange site 100 may be designed as a local areanetwork (LAN) and include, for example, one or more security routers andone or more back office computers, among other equipment. For purposesof illustration only, two security routers 111, 112 and three backoffice computers 130-1 130-2, 130-3 (referred to collectively as backoffice computer 130) are shown in FIG. 1. The security routers 111, 112control communications between the back office computers 130 and thecommunications links 300. Each security router 111, 112 transmits andreceives communications over the communications links 300, as well asrestricts communications from unauthorized sources. More particularly,the security router 111, 112 may be used to isolate the equipment at theexchange site 100 from intrusion and facilitate communication with theback office computers 130.

The back office computers 130 manage the trading of the varioussecurities (e.g., futures, options, swaps or other derivatives;currencies, stocks, bonds, or other physicals like corn, preciousmetals, electricity, etc.) and/or other items traded on the exchange.For example, one or more of the back office computers 130 may functionas market servers. In this capacity, they may maintain order books,perform order matching, generate market information for use at theexchange site 100 and/or for transmission over the communication links300, and supply trade information to other back office computers 130 foraccounting and/or cash settlement purposes. One or more of the backoffice computers 130 may function as short-term accounting servers. Assuch, these computers may receive information from the market serversand generate information for transmission over the communication links300. The short-term accounting servers may be initialized with statusinformation from the previous day's trading before performing accountingtasks for the current day. One or more of the back office computers 130may function as long-term account servers and, accordingly, function tocollect data from the short-term accounting servers for batch processingand record. The long-term account servers may supply information toinitialize the short-term account servers and generate reports fortransmission to trading sites 200. Of course, the back office computers130 may perform additional functions and a single computer may performmore than one of the above functions.

The trading sites 200 may include a LAN architecture having one or moresecurity routers, one or more backend computers, one or more traderstations, and one or more hubs, among other equipment. For purposes ofillustration only, FIG. 1 shows two security routers 211, 212, twobackend computers 220, 225, three trader stations 230-1, 230-2, 230-3,(collectively referred to as trader stations 230) and two hubs 240, 241.The security routers 211, 212 transfer trading information between thetrading site 200 and the exchange site 100 and screen communicationsfrom unauthorized sources. The hubs 240, 241 distribute data between thebackend computers 220, 225 and the trading stations 230.

Backend computer 220 may be configured as a communication server for thetrader stations 230. The exchange often supplies software and/orhardware for the backend computer 220 to facilitate communications withthe exchange site 100. Backend computer 220 handles communicationsbetween the trader stations 230 and the back office computers 130 of theexchange. Of course, the trader site 200 may include multiple backendcomputers 220.

Backend computer 225 may also be equipped with software and/or hardwarethat facilitates communications with the exchange site. Some exchanges,for example, such as the EUREX (the German and Swiss DerivativesExchange), recommend installation of a redundant on-site backendcomputer in the event that the primary communication backend computer220 fails. In addition, backend computer 225 may be configured toperform automated trading functions under the control of one or more ofthe trader stations 230. The automated trading functions are describedin more detail below. The backend computer 225 should be equipped with ahigh-speed processor and sufficient memory to efficiently handleautomated trade processing. The trader stations 230 may control backendcomputer 225 remotely through a communication link 250, for example, aWAN. The trader site 200 may include multiple backend computers 225.

In one preferred embodiment, backend computer 225 is dedicated orsubstantially dedicated to performing automated trading-relatedfunctions, as discussed in greater detail below. Backend computer 220,rather than backend computer 225, may be assigned trading-related tasks,such as (1) serving as a gateway to communicate market information fromthe exchange site 100 to trader stations 230, (2) submitting, deleting,and modifying orders and quotes to exchange site 100 from the traderstations 230, (3) receiving real-time trade confirmations and end-of-dayback office reports, and/or (4) performing risk analysis, positionmanagement, and accounting functions. In this way, backend computer 225may perform automated trading functions with limited interruption ordelays associated with other tasks the backend computers (such asbackend computer 220) may be requested to perform. This increases theresponse speed for automated trading operations. Moreover, the totaltime delay in submitting an order to the exchange site 100 includes acomponent attributable the transmission delay or network lag intransmitting signals between the exchange site 100 and the trader site200. Therefore, backend computer 225 is preferably located near to theequipment of the exchange site 100 to reduce delays associated withtransmitting information and orders between the backend computer 225 andthe exchange site 100. Accordingly, the total time for responding totrading opportunities can be reduced both by reducing transmissiondelays and by increasing decision-making speed at the trader site 200.Significantly, the backend computer 225 may be remotely supported orcontrolled by a distant trader station 230, which permits the traderstation 230 to be located virtually anywhere without adversely affectingthe response time of the automated trading system. Accordingly, thetrader site 230 may be chosen based on considerations such as tax, realestate costs, and quality of life, without having to worry that traderstation location will impair the performance of automated tradingcarried on by backend computer 225.

Trader stations 230 receive information from the exchange site 100,process that information, and display at least part of it on a monitor.Each trader station 230 typically runs interactive software that enablesa trader, among other things, to submit orders and/or quotes to theexchange site 100. As discussed further below, one or more of the traderstations 230 may additionally be equipped with software for controllingthe automated trading functions of backend computer 225.

FIG. 2 illustrates an alternative embodiment of an electronic tradingexchange system network 20. For the sake of brevity, features of FIG. 2similar to those in FIG. 1, which are described above, will not berepeated. In FIG. 2, the trading site 200 includes an automated tradingsystem computer 225-2 separate from the backend computer 225-1. In thisembodiment, the automated trading system computer 225-2 performsautomated trading system functions and the backend computer 225-1manages communications between the automated trading system computer225-2 and the exchange site 100. The automated trading system computer225-2 may be connected to the backend computer 225-1 using, for example,network interface cards or through a hub (not shown). The automatedtrading system computer 225-2 may be controlled using one or more traderstations 230 either locally or through a communication link 250.Alternatively, the automated trading system computer 225-2 may becontrolled through the communication computer 225-1 (as indicated by thedotted lines), which would serve to communicate information between thetrader stations 230 and the automated trading system computer 225-2.

FIG. 3 provides a functional diagram illustrating the operation of anembodiment of an automated trading system used in connection withoptions trading. Of course, the embodiment may be modified for use intrading other securities (e.g., futures, options, swaps or otherderivatives; currencies, stocks, bonds, or other physicals like corn,precious metals, electricity, etc.) and/or other items traded on theexchange. The automated trading system is preferably resident in thebackend computer 225 as configured in FIG. 1, which may utilize multipleCPUs. However, it may also be resident in one or more of the traderstations 230 or the backend computers 220. The automated trading systemsoftware may run in a text-based environment or a Windows orWindows-like environment. For example, the automated trading system maybe run on an operating system, such as VMS, DOS, or LINUX, or in aWINDOWS or similar operating system, which is more user-friendly. Insome operating systems, automated trading may be assigned priority overother tasks or processes and run without debug messages. Localdecision-making times of less than 250 microseconds have been achievedin a text-based VMS system run on a backend computer 225 and times of50-150 milliseconds or less have been achieved on a Windows-based systemrun on a trader station 230, depending on the processor load from othertasks.

The automated trading system receives and decodes current marketinformation broadcast from the exchange site 100 through a receiverinterface 410. The decoding of market information may be performed, forexample, transparently by software supplied by the exchange for use withthe backend computers, by the exchange software at the request ordirection of the automated trading system, or by the automated tradingsystem itself. The current market information may include informationrelated to the options and underlying security of the option.Specifically, market bid, ask and last prices and the day's volume forcall options (the right to buy the underlying security at a specifiedtime in the future at a specified price), put options (the right to sellthe underlying security at a specified time in the future at a specifiedprice) and the underlying security, to name a few, are typicallyreceived by the trader site. An option look-up protocol 420 is used tolocate the particular option identified in the current marketinformation in an option look-up array or table 430, which may be formedin memory of the backend computer 225. The look-up protocol 420 may beany of several known look-up or search protocols. For example, thelook-up protocol may involve a linear search, search tree, use of a hashor index table, or other known search protocol.

The option look-up array or table 430 stores information concerningoptions that may be automatically traded. For simplicity, atwo-dimensional table having rows and columns will be described.However, it should be understood that higher-dimension arrays or tablesmay be used in connection with the present invention. Each row of theoption look-up table 430 stores information relevant to a particularoption including, for example, option name, current market prices, timesand quantities of the most recent trades by the trader, maximum orderquantity, and whether automated trading is enabled for the option. Asdiscussed further below, this information may be used as a check againsterroneous operation. Alternatively, option look-up table 430 may storeinformation in connection with items that are actually beingautomatically traded at a given time. As a further alternative, look-uptable 430 may include indices that link only the items currently enabledfor automated trading and skip those for which automated trading is notenabled. In such a case, an additional table may be maintained for thefull set of items for which automated trading may be performed. This isuseful in increasing the speed at which a disabled option can beenabled. Accuracy checks may use both the additional table and look-uptable 430. Communications between the automated trading system and thetrader stations 230 are conducted through a trading station interface440. For example, a trader station 230 may update information containedin the option look-up table 430 via a trading station interface 440. Inthis way, the option look-up table 430 may be updated to enable(disable) automated trading for a particular option.

The option look-up table 430 may be organized in several different ways.For example, the market bid and ask prices for a particular option maybe stored in different rows of the option look-up table 430.Alternatively, the bid and ask prices may be stored in the same row ofthe option look-up table 430, but in different columns, or as differentcells in a price dimension, for example. Also, the option look-up table430 may be segmented, for example, so that all bid prices are groupedtogether and all ask prices are grouped together. Different classes ofoptions (i.e., options with different underlying securities) may beindexed in a single look-up table 430 or in multiple look-up tables 430,for example, with each option having its own look-up table 430.

In addition to the current market information concerning option trading,the automated trading system may receive and decode current marketinformation concerning the security (or securities) underlying theoptions. For example, an exchange that trades the underlying securitytypically maintains a book of bid (ask) prices and quantities of currentorder and quotes of those traders wishing to buy (sell) the underlyingsecurity. The automated trading system may receive the underlying marketinformation, for example, from the exchange site 100, from a separateexchange site, or from another market feed either directly orindirectly, to e.g., through a trader station 230. The underlying marketinformation for a given security may be indexed in a theoretical pricelook-up array or table 435, which may be formed in the memory of backendcomputer 225, to identify theoretical buy and sell prices for optionsassociated with the underlying security. While the theoretical pricelook-up table 435 may constitute a multi-dimensional array or table, atwo-dimensional table will be described for purposes of simplicity. Itshould be understood that data structures other than arrays or tablesmay be used in connection with the present invention. The theoreticalprice look-up table 435 may be updated by a trading station 230 viatrading station interface 440. In one embodiment, the trader station 230supplies the content of the theoretical price look-up table 435 to theautomated trading system.

The theoretical buy and sell prices for derivatives, such as options,may be determined using mathematical models. The mathematical modelsproduce a theoretical value for an option given values for a set ofvariables that may change over time. Variables considered in thesemodels may include (1) the current market price of the underlyingsecurity (e.g., the price of the stock or future from which the optionis derived), (2) risk free interest rates, (3) volatility of underlyingprice, (4) dividend stream, (5) time until expiration, (6) whether theoption can be exercised before the expiration date, and (7) whether theoption is a call or put. Variables (2)-(7) are not likely to change asfrequently as the price of the underlying security, variable (1). Somevariables, such as price of the underlying security, can be derived fromthe market. Other variables require some qualitative assessment by thetrader. In one embodiment of the invention, the current market price ofthe underlying security is used to index the theoretical price look-uptable 435. However, the theoretical price look-up table 435 may beindexed using other variables in addition to or instead of currentmarket price of the underlying security.

The current market price of the underlying security may be defined inseveral different ways. At any given time during normal trading, theunderlying security will usually have: (1) bid prices and quantities;(2) ask prices and quantities; (3) a last price and volume at which theunderlying security was traded (last price); (4) an average of thecurrent highest bid and lowest offer prices (average best bid, best askprice); and (5) an average price of a certain depth, among other values.The average price of a certain depth, say 5000 shares, would take theaverage of the: (a) best (highest) bid prices in the book of the first5000 shares, and (b) best (lowest) offer prices in the book of the first5000 shares. Obviously, there are many more definitions of underlyingprice that can be created, for example, using permutations of the fivedefinitions provided above.

It is highly probable that at least four of these five definitions willyield (perhaps slightly) different results at any time. Since the normalhedging response of an option trade is to buy or sell the underlyingsecurity, the option trader may very carefully define underlying priceused in her models. Specifically, buying (selling) calls and selling(buying) puts will usually lead to selling (buying) the underlying forhedging. For reasons discussed further below, the trader may want to setthe theoretical buy price for call options and the theoretical sellprice for put options using the bid price (and/or possibly bidunderlying depth) of the underlying security. Likewise, the trader maywant to set the theoretical sell price for call options and thetheoretical buy price of put options using the ask price (and/orpossibly the ask underlying depth) of the underlying security. Insummary, theoretical value calculations used for automatic optiontrading should be flexible enough to use various definitions ofunderlying price.

In addition to generating a theoretical value for an option, the traderselects a buy spread and a sell spread. The buy spread may be subtractedfrom the theoretical value to produce the theoretical buy price—thehighest price at which the trader is willing to buy a particular optionusing automated trading. The sell spread may be added to the theoreticalvalue to produce the theoretical sell price—the lowest price at whichthe trader is willing to sell a particular option using automatedtrading. Accordingly, the trader would like to sell an option having abid price that is the same as, or higher than, the trader's theoreticalsell price. The trader would like to buy the option from anyone offeringa price that is the same as, or lower than, the trader's theoretical buyprice.

Accordingly, in the embodiment illustrated in FIG. 3, the theoreticalprice look-up table 435 is designed to correlate the current marketprice of an underlying security to the theoretical buy and sell pricesof the options for which automated trading is performed. For example, ifautomated trading is performed for options underlying Exxon stock, thetheoretical price look-up table correlates the current price of Exxonstock to the theoretical buy and sell prices of Exxon stock options. Ifthe price of Exxon stock changes, the theoretical price look-up tablecan be used to index different theoretical prices for the Exxon stockoptions.

Similar to the option look-up table 430, the theoretical price look-uptable 435 may to be organized in several ways. For example, alltheoretical buy prices for a given price (such as bid price or askprice) of an underlying security may be provided in a single column of alook-up table 435, with a separate look-up table provided fortheoretical sell prices. Alternatively, the look-up table 435 may indexboth a theoretical buy price and a theoretical sell price. Thetheoretical price look-up table 435 may be segmented ormulti-dimensional. Moreover, the theoretical price look-up table 435 maybe combined with, a portion of, or linked to option look-up table 430.

In addition, the theoretical look-up table 435 and the option look-uptable 430 can be structured consistent with the particular searchprotocol used by the option look-up protocol 420 so that certain optionsor other items are located by the search protocol before other optionsor items. For example, if option look-up protocol 420 implements alinear search, the first options in the option look-up table 430 and thetheoretical look-up table 435 (e.g., at the top of the tables 430 and435) will be reviewed by the option look-up protocol 420 before optionsat the bottom of the table. Accordingly, the trader station 230 or thebackend computer 225 may structure the option look-up table 430 and/orthe theoretical price look-up table 435 so that options that have shownin the past, or are likely to show in the future, the most promisingprofits will be located first. The particular order of the options inthe tables 430 and 435 may depend on the trading volume in an option,for example. Options with relatively high traded volumes over recenttrading days or the current trading day may be given a higher priorityranking in look-up table 430 and/or theoretical price look-up table 435.Moreover, some exchanges may limit the number of orders that aparticular trader may submit at a given time. Accordingly, structuringthe tables 430 and 435 as described increases the opportunity for thetrader to participate in the most lucrative transactions when there arerestrictions on the number of concurrent orders placed.

In accordance with the embodiment shown in FIG. 3, the trader station230 may respond to changes in variables (2)-(7) and/or other variablestaken into account in determining theoretical buy and sell prices byupdating the theoretical price look-up table 435. Alternatively, thetheoretical price look-up table 435 may hold theoretical prices overranges of any one or more of the items defined by theoretical pricevariables (1)-(7) described above, as well as other variables that onemay wish to take into account, such as variable buy and sell spreads(described in more detail below). In such a case, theoretical price isidentified in an n-dimensional look-up table 435 responsive to nvariables. Calculating the theoretical value for options or othertrading derivatives can be relatively time consuming. Moreover, thetheoretical values for a series of options change when one of thecontributing variables changes. As noted above, some of these variables,such as price of the underlying security, may change frequently. Use ofthe theoretical price look-up table 435 avoids the need forrecalculating theoretical prices when the value of a variable thataffects the theoretical price changes. Calculating the theoretical priceeach time a variable changes unnecessarily consumes computer resources,such as CPU time, better allocated to performing automated trading. Theautomated trading system of the present invention utilizes aprecalculated table of theoretical prices over a range of one or morevariables that affect theoretical price. Accordingly, when a variableaffecting theoretical price (such as the market price of the underlyingsecurity) changes, the automated trading system simply references a newtheoretical price in the theoretical price look-up table 435 and usesthe new theoretical price in deciding whether to buy or sell options.

The values stored in the theoretical price look-up table 435 may becalculated, for example, using one or more of the trader stations 230, abackend computer 220, the backend computer 225, or some combination ofthese. When a trader station 230 calculates the values for thetheoretical price look-up table 435, the backend computer 225 may befree to focus its computing resources on automated trading. However, theadditional overhead associated with using the backend computer 225 tocalculate the values for the theoretical price look-up table 435 may beacceptable in some applications.

Referring still to FIG. 3, decision logic 450 compares the theoreticalprice identified in the theoretical price look-up table 435 to themarket price for the option, and based on the comparison, determineswhether the option should be bought or sold. For example, in anembodiment in which the theoretical look-up table 435 indexestheoretical buy and sell prices for a particular option based on theprice of the underlying security, decisions may be triggered (1) whenthe market price of the underlying security changes, but the market bidand ask prices of the option remain the same (i.e., changing underlyingprice, static option price), (2) when the bid or ask price of the optionchanges, but the market price for the underlying security remains thesame (i.e., changing option prices, static underlying price), (3) whenthe values of theoretical price table 435 are updated, (4) whenautomated trading is enabled for a particular option, and (5) whensafety checks are relaxed for a particular option.

Consider example (1) in which the theoretical buy (sell) price of aparticular option to changes (for example, as a result of a change inunderlying security price) and the bid and ask prices of an optionremain static. Decision logic 450 will compare the current market ask(bid) price of the option to the new theoretical buy (sell) priceobtained from the theoretical price table 435. In this case, thedecision logic 450 performs all comparisons affected by the change inunderlying price. For example, a change in the bid (ask) price of theunderlying security may affect the theoretical buy (sell) price of someor all call options and the theoretical sell (buy) price of some or allput options associated with the underlying security. Accordingly, thedecision logic 450 makes comparisons of market bid or ask pricescorresponding to new theoretical sell and buy prices.

Consider example (2) in which the market bid (ask) price for aparticular option changes and the price of the underlying securityremains static. The decision logic 450 will compare the new market bid(ask) price to the corresponding theoretical sell (buy) price thatexists at that time from the theoretical price table 435. Accordingly, achange in market bid (ask) price of a particular option may trigger acomparison of market bid (ask) price to theoretical sell (buy) price.Based on the comparison, for example, if the market bid (ask) price isgreater (less) than or equal to the theoretical sell (buy) price, theautomated trading system may prepare an order for the particular option.

Consider example (3) in which the theoretical price look-up table 435 isupdated with static market option and underlying prices. For example,when the look-up table 435 is updated, the decision logic 450 comparesthe updated theoretical buy and sell prices corresponding to the currentmarket price of the underlying security to the current ask and bidprices of the options subject to automated trading. As noted above, thetheoretical price look-up table 435 may be updated when, for example,one or more of the values that effect the theoretical buy and sellprices changes such as, but not limited to, the buy and ask spreadsand/or theoretical variables (2)-(7). For example, theoretical pricevariables (2)-(7) discussed above could change, perhaps due to a changein the trader's assessment of market conditions. These changes may occurwhen the trader enters new information through a trader station 230 orwhen new information becomes available through another source (e.g., achange in risk-free interest rate occurs in a database associated withthe trading site 200). A change in one or more of variables (2)-(7)triggers a re-computation of (probably) all values in the theoreticallook-up table 435. These new values in table 435 are updated on backendcomputer 225. Accordingly, the decision logic 450 makes comparisons ofmarket bid and ask to prices corresponding to new theoretical sell andbuy prices.

Consider example (4) when automated buying or selling trading for aparticular option is changed from disabled to an enabled state. Thiscould arise, for instance, at the beginning of the trading day if thedefault state of a new trading session is all options disabled. Enablingautomated selling (buying) for a particular option or group of optionscan trigger decision logic 450 to make a comparison of the market bid(ask) prices to the theoretical sell (buy) price in table 435.

In addition to enabled and disabled states, a third, “warming up” or“test” state may be provided for an option in the automated tradingsystem. In this third state, the automated trading system may performall steps except actually placing an order. This allows the trader tomonitor the operation of the automated trading system without actuallysubmitting orders, thereby reducing the risk of enabling options forautomatic trading using theoretical prices which are not marketrealistic.

Consider example (5) in which a safety check for a particular option isrelaxed. This could arise, for example, if a global safety checkcondition implemented by safety check logic 460 is disabled or changed.For example, a safety check condition relating to the maximum quantityor frequency of trading attempts of a particular option may beincreased. In connection with the trading frequency condition, theentire automated trading system may be held in a “pause” state if it hadmade more than a predetermined number (e.g., 3) automated tradingattempts within a predetermined time period (e.g., 60 seconds). If thisglobal safety check is disabled or relaxed, for example, by increasingthe predetermined number of attempts (e.g., from 3 to 5), the tradingfrequency safety check may no longer be in violation. As a result, theentire automated trading system may transition from the “paused” stateto the enabled state. If a particular option had been enabled forautomated selling (buying), the decision logic 450 will then compare themarket bid (ask) price to the theoretical sell (buy) price in table 435.

Decision logic 450 determines that a sell (buy) order should besubmitted if the market bid (ask) price is greater (less) than or equalto the theoretical sell (buy) price. Even if decision logic 450determines that an order should be submitted, safety check logic 460 maybe used to prevent an order from being submitted. Safety check logic460, for example, can block orders entirely, or put a cap on the maximumquantity attempted to be bought or sold, for an option when acceptanceof that order would result in the trader having a position greater thana predetermined threshold quantity of that option. Also, the automatedtrading system may be paused or stopped if the number of attemptedorders exceeds a predetermined amount in a predetermined period of time.The constraints may be provided in look-up tables provided to theautomated trading system and may be varied for individual options. Otherconstraints may involve generating warnings and/or preventing orders,for example, when the: is (1) theoretical buy price exceeds thetheoretical ask price, (2) theoretical buy price exceeds the theoreticalvalue, (3) theoretical sell price is less than the theoretical value,and/or (4) theoretical sell price is less than the intrinsic value ofthe option. The intrinsic value may be defined as the difference betweenthe strike price and the market price of the underlying security forputs, and the difference between the market price of the underlyingsecurity and the strike price for calls, where the minimum intrinsicvalue is zero. The trader may be able to override some or all of thechecks performed by safety check logic 460 to increase speed ofautomated trading.

If the safety checks are passed (or overridden), order logic 470 createsan order and submits the order to the exchange site 100 via an outputinterface 480. The trading station 230 is notified through a tradingstation interface whether or not the safety checks are passed. Theoutput interface 480 may pass the order to exchange interface softwarefor ultimate transmission to the exchange site 100. The receiverinterface 410 and the output interface 480 may be formed by commonequipment and/or data ports.

FIG. 4 illustrates an example of theoretical price look-up table 435 forcall options with an expiration date of Sep. 20, 1999; an annualizedvolatility of 32.0%; expected dividend to be paid on the underlyingsecurity on Aug. 19, 1999, for an amount of $10.0; risk free interestrate of 3.0%; American style option; and today's date being Jun. 3,1999. When created, the look-up table 435 may be centered about thecurrent price of the underlying security. Each row of the look-up table435 provides theoretical prices for a given strike price. Asillustrated, the look-up table 435 includes twenty (20) rows havingstrike values ranging from 50.0 to 97.5, in increments of 2.5. Thestrike values correspond to individual options available for trading asdetermined by the exchange. The trader may limit the set of options tothose he/she actually trades, and consequently can enable them forautomatic trading, individually or in predefined groups. The columns ofthe look-up table 435 provide theoretical prices for a given price ofthe underlying security. The range of underlying security price providedin the table and the incremental price between adjacent entries (tick tosize) can be selected by the trader. For example, the look-up table 435shown in FIG. 4 has twenty-nine (29) price entries ranging from 75.0 to77.8 with tick size is 0.1 and with the underlying price centered at76.4. A smaller tick size and a larger range will, of course, result ina larger look-up table. Under the assumptions of FIG. 4, a September1999 call, with a strike price of 72.5 and an underlying price of 77.2(using a definition of underlying price determined by the trader), has atheoretical price of 7.30.

Several alternatives are available for updating the look-up table 435 toavoid the underlying price from exceeding the boundaries of the table.For example, the automated trading system may notify the trader station230, which may then in turn supply an updated look-up table 435 centeredabout a new underlying price. The trader station 230 may be called uponto calculate the additional entries needed to complete the updatedlook-up table 435 or simply recall them from memory. For example, thelook-up 435 table may be updated dynamically from the trader station 230when the underlying price moves from the center price by a predeterminedmargin. This methodology serves to increase the processing power thatthe backend computer 225 can apply to automated decision making. Thelook-up table 435 can be checked periodically to ensure the accuracy ofits content. For example, checks may be performed every, say, 15seconds. This can be done, for example, by performing a checksumoperation in which the entries in the look-up table are summed and thesum is compared with the sum of a corresponding look-up table maintainedby a trader station 230. If the sums match, the look-up table 435 may bepresumed to be accurate. If the sums do not match, a warning isgenerated and automated trading is stopped completely or paused untillook-up table 435 is reloaded or updated and accuracy can be ensured. Ofcourse, other or additional techniques for testing the accuracy oflook-up table 435 may be implemented. Moreover, such an accuracy checkmay be omitted if one is sufficiently confident in the reliability ofthe software and hardware.

Knowledge of how the search protocol locates data within the look-uptables may be used to structure the look-up tables to ensure thatselected options will be located particularly quickly. The selectedoptions may be, for example, frequently traded options and/or optionswhose price will become attractive with a small change in the underlyingsecurity price. For example, the look-up protocol may conduct searchesby starting at the first row of the table and then stepping through eachsuccessive row until a particular row is identified. In this case, thelook-up table may be structured so that a select option is placed in thefirst row. Consequently, the search protocol will locate the selectoption first. Statistics may be maintained, for example, at a traderstation 230, and used to restructure the look-up table as tradingconditions change.

The embodiment described in connection with FIG. 3 compares the currentmarket price of an option to theoretical buy and sell prices from atheoretical option price look-up table 435 to make a buy/sell decision.However, other values may be compared consistent with the presentinvention to generate buy/sell decisions. For example, the theoreticaloption value may be subtracted from the market bid (ask) price andcompared to a sell (buy) spread selected by the trader to generatebuy/sell decisions. Alternatively, the market option bid (ask) price andthe price of the underlying security may be used to index an impliedvolatility value, for example, with that indexed implied volatilityvalue compared to a trader-generated volatility value to make buy/selldecisions. Of course, other values may also be indexed and used forcomparison to generate buy/sell decisions consistent with the presentinvention.

FIG. 5 illustrates an embodiment of a trader screen 500 displayed on atrader station 230 in connection with trading options on a particularsecurity or commodity. The trading screen 500 may provide a graphic userinterface to enable the trader to set parameters associated withautomated trading. Trading screen 500 is organized as an array of cells510. The rows 512 of the array represent different options available inthe market for the particular security or commodity. The columns 514 ofthe array provide information concerning the options. More particularly,the columns to the left of the “Strike” column provide information oncall options and the columns to the right of the “Mon” column provideinformation on put options. Call and put options are, thus, displayed asmirror images of each other.

Each row of the array represents information relating to a differentpair of call and put options for a particular strike price, month andyear. The first column from left to right is labeled “DCX,” whichidentifies the underlying security for the options as Daimler-Chryslerstock. The values below the “DCX” label consecutively number the rows ofthe array. The trading screen may be scrolled up or down to viewadditional rows in the array, if any exist. The next fourteen columnscontain information relating to call options. The second column, “POS,”is to the right of the “DCX” column. The values below the column headingPOS indicate the trader's position (i.e., how many of the options thetrader possesses) in call options for each row of the array. A negativecell value in the “POS” column indicates that the trader has sold moreof the option than she has bought (this is called a short position.Positive values denote a long position). Cells in the “B” column (threecolumns to the right of the “POS” column) indicate whether automatedbuying is enabled for the particular options corresponding to thosecells. Cells in the “S” column (three columns to the right of the “B”column) indicate whether automated selling is enabled for the particularoptions corresponding to those cells. The trader may select one or moresells in the “B” and “S” columns to enable or disable automated buyingand selling, respectively, of options corresponding to the selectedcells.

The “TBid” and “TAsk” columns indicate the theoretical buy and sellprices for automated trading. The “Theo” column represents thetheoretical value assigned to the call option for each row. To the rightof the “Mon” column, the screen provides “TBid,” “TAsk,” “Theo,” and“POS” columns, among others, for the put options in each row of thearray. Additional details concerning the remaining columns of the traderscreen 500, as well as other information concerning its functionality,can be found in U.S. application Ser. No. 09/273,362 to Marynowski etal., filed Mar. 22, 1999, and expressly incorporated herein byreference.

The “POS” columns provide information received from the exchange siteand are not adjustable by the trader. The “TBid,” “TAsk,” and “Theo”columns may be adjusted by the trader using a mouse, keyboard, or otherinput device, such as a game pad. For example, the trader may select aparticular “TBid” or “TAsk” cell by clicking once and then using up ordown arrows, for instance, to increase (arrow up) or decrease (arrowdown) the value. Mathematically, this may be achieved by increasing ordecreasing the bid spread value (BSprd) or the ask spread value (ASprd).This may not effect the “Theo” value since BSprd and ASprd are notinputs into the “Theo” calculation. A particular “Theo” cell may beadjusted in the same manner as a “TBid” or “TAsk” cell. Mathematically,adjustments to a Theo cell may be achieved by increasing or decreasingthe assumed volatility of that particular option. Since “TBid” and“TAsk” of a particular option are related to the “Theo” value, changesto the “Theo” obviously will change “TBid” and “TAsk.” The “TBid”,“TAsk”, and “Theo” values may also adjustable in groups, for example, byselecting multiple cells or all cells in the column by selecting thecolumn header. The trader station 230 may update the displayed values ofTheo, TBid and TAsk values as the underlying security price change, orany variable contributing to Theo, TBid, or TAsk change (such astheoretical variables (2)-(7) discussed above). For example, the traderstation 230 may receive a market to feed providing price informationconcerning the underlying security. The price information may be used toupdate or refresh the trading screen 500. This may include the displayedTBid, TAsk, and Theo values for a given underlying price. Additionally,market information received by 230 may trigger an update of thetheoretical price look-up table 435 maintained at the backend computer225. For example, if the underlying price has moved sufficiently farenough from the value of the underlying security used the last timetable 435 was created and/or last modified, trading station 230 mayupdate theoretical look-up table 435 using the most current underlyingprice as a new center point. The updates of the theoretical pricelook-up table 435 maintained at the backend 225 might be accomplishedseveral different ways. For example, the trader station 230 may performcalculations and supply the calculated information to the backendcomputer 225 for updating the theoretical price look-up table 435. As analternative, the trader station 230 may supply data to the backendcomputer 225, which is used to calculate updates of the theoreticalprice look-up table 435. Of course, updates of look-up table 435 may notbe necessary if the new information (e.g., price information of theunderlying security) corresponds to a value: (1) already in thetheoretical price look-up table 435, and/or (2) within predeterminedmargins around the previous center value of the look-up table 435.

FIG. 6 provides an exemplary progression of steps from transmission ofthe current market information from the exchange site 100 to receipt oftrade confirmation by the trader site 200 and the delay experienced ateach step. Link 1 represents the line delay experienced by currenttrading information as it is transmitted from the exchange site 100 tothe trader site 200. Locating the automated trading system close to theexchange site 100 reduces the line delay of Link 1 (as well as that ofLink 15). Thus, by reducing the delay associated with making automatedtrading decisions as well as the associated line delay, the overallspeed in submitting orders to the exchange site 100 is increased.Moreover, the trader station 230 that monitors and controls the backendcomputer 225 that implements the automated trading need not be locatedclose to the exchange site 100, but may monitor and control the backendcomputer 225 remotely.

Link 2 represents delays associated with operating system (networkingsubsystem) related to receiving data packets from the exchange site 100.One technique for reducing this delay is to choose a platform, such asVMS or Linux, that has a good quality implementation of networkingservices used in automated trading.

Link 3 represents delays associated with decompressing informationreceived from the exchange site 100. Link 4 represents other processingdelays that may be inherent in exchange interface software provided bythe exchange for use at the trader site 200. The exchange interfacesoftware allows the trader's equipment to interface with the exchangeequipment. The exchange may impose obligations requiring traders to usethe exchange interface software in trading. The exchange interfacesoftware, for example, may process the received market data and supplythe data to an interface of an automated trading application installedby the trader. For instance, the market data may be input to internaltables and/or may be converted to actual values. Links 5 and 6 representdelays associated with the distribution of information from the exchangeinterface software to an interface of the trading system application.The exchange site 100 typically broadcasts information concerning alltraded items. Each trading application usually subscribes to severalsources of data (e.g. market data and trade confirmations for severalproducts). In some cases, the exchange interface software will receiveand decode all information received from the exchange site 100, but onlypass some of the information to the interface of the automated tradingsystem. The exchange interface software spends some time in determiningwhether a particular piece of market information should be passed to theautomated trading system. The exchange interface software and thetrading system interface software communicate via a protocol. Forexample, the exchange interface software may notify the automatedtrading system via a callback function supplied by the latter, or bysome other operating-system dependent mechanism (e.g., mailboxes onVMS). This delay can be reduced by choosing a platform that efficientlysupports the protocol chosen.

After receiving the current market information, the automated tradingsystem decodes the information and, using a look-up protocol, searches atable of traded products, resulting in a delay indicated by link 7. Ahash table with an efficient hash key or a search tree may be used toreduce the delay associated with the processing associated with link 7.The particular look-up protocol should be fine-tuned to the platformused for the automated trading system as performance may vary with theplatform to the extent that a linear search may prove better than a hashtable even for a surprisingly large number of products (over 100). Thelook-up time for hash tables is almost constant. For binary trees, thelook-up time is proportional to the logarithm of N (in O(log N)), whereN is the number of products traded. A linear search has a look-up timethat is proportional to N (in O(N)). Of course, the actual times toencountered in practice matter, so the look-up protocol should betailored to the platform used

Link 8 represents the delay attributable to decision-making and safetychecks. As noted above, decisions are made based on a numeric comparisonbetween the current market price and the corresponding theoreticalprice. Safety checks account for most of the delay experienced in link8. Safety checks may include, for example: (1) price and quantityreasonability checks, and (2) trade attempt frequency limitations.

Links 9-15 corresponds to the delay associated with composing an orderand submitting the order to the exchange. In particular, link 9 reflectsthe time spent composing the order, which may require a format definedby the exchange. Link 10 corresponds to the time required for theautomated trading system output interface to communicate the order tothe exchange interface software. This may be done, for example, using asynchronous function call or an asynchronous call. In some embodiments,the tasks associated with links 9 and 10 may be performed at the sametime. Links 11 and 12 correspond to the time expended while the exchangeinterface software receives the order, decides which module should beused to submit the order, interprets the order request, and performs aseries of validations. If the order passes these tests, it is convertedinto the exchange format and passed to the exchange, as indicated bylinks 13-15.

As noted above, the delays attributable to links 1 and 15 may be reducedby locating the automated trading system close to the exchange site 100.In addition, if routers and LANs are used at the trader site 200, theselection of high-speed equipment may reduce delays and/or priorityschemes. The delay experienced in links 2-14 may be reduced, of course,by using a faster computer. However, the efficiency of the software andalgorithms is also an important factor in reducing delay. Further, insome situations, it is possible to integrate the automated tradingsystem software with the software that interfaces with the exchange site100, which leads to reduced delay. In such a case, the automated tradingsystem receiver and output interfaces may be the same as the exchangereceiver and output interfaces.

In accordance with the present invention, assuming a change in the bidor ask price, links 6 and 7 may be completed within 80 microseconds, andcommonly may be completed within 60 microseconds, and as fast or fasterthan 31 microseconds. The time from link 6 to the completion of thedecision-making by the decision logic may be less than 155 microseconds,less than 120 microseconds, and even less than 80 microseconds. Links6-8 may be completed within 690 microseconds, may be completed within370 microseconds, and performed as fast as 260 microseconds or less.Links 6-9 may be completed within 930 microseconds, commonly becompleted within 585 microseconds, and as fast or faster than 301microseconds. Assuming now a change in the price of the underlyingsecurity, the time from receipt of the new price information by theautomated trading system to submission of an order may be may be thesame as or about 20-25 microseconds more than the totals provided inconnection with links 6-9 above, depending on the number of options orother items in the data structure (e.g., table) and their respectiveorder. The times required for links 2-5 and 10-14 are generallydetermined by exchange software and, accordingly, may change fromexchange to exchange.

Link 16 reflects the processing of the order at the exchange site 100.Following the exchange site 100 processing, a confirmation of the tradeis returned to the trader if the trader's order is matched. Not allorders result in a match. There is no sharing of lucrative trades withother traders who may have submitted similar matching orders that arereceived by the exchange even some microseconds later.

The embodiment illustrated in FIG. 6 corresponds to an arrangement inwhich the interface software provided by the exchange and the automatedtrading system are resident on the backend computer 225. In arrangementsin which the interface software and the automated trading system areresident on separate backend computers, the vertical dashed line 610indicates the interface between the separate computers. The separatebackend computers may be connected via network interface cards or acommon hub. Additional delays may be experienced in the transmission andreception of between the backend computers as well as from LANthroughput and latency.

FIG. 7 provides a schematic of an embodiment of an electronic tradingexchange system network 70 coupled to multiple trading sites. Theelectronic trading exchange system network 70 is similar to that shownas 10 in FIG. 1 and, for the sake of brevity, duplicative descriptionwill be omitted.

As shown in FIG. 7, exchange site 700 is coupled to trader site 200 bycommunication links 300. In one embodiment, the exchange site 700 may bedesigned as a local area network (LAN) and include, for example, one ormore security routers and one or more back office computers, among otherequipment. For purposes of illustration only, a single security router710 and three back office computers 730-1, 730-2, 730-3 (referred tocollectively as back office computers 730) are shown in FIG. 7. Securityrouter 710 controls communications between the back office computers 730and the communications link 300. Security router 710 transmits andreceives communications over the communications link 300, as well asrestricts communications from unauthorized sources. More particularly,the security router 710 may be used to isolate the equipment at theexchange site 700 from intrusion and facilitate communication with theback office computers 730. The back office computers 730 manage thetrading of the various securities, currencies, commodities and/or otheritems traded on the exchange. In this regard, back office computers 730may function similarly to the back office computers 130 of exchange site100.

For purposes of illustration only, trading site 200 additionallyincludes a security router 213 and a backend computer 223 coupled to hub240. The security router 213 and backend computer 223 may be locatedremotely from other equipment of the trader site 200. Security router213 transfers trading information between the trading site 200 and theexchange site 700. As above, the security router 213 screenscommunications from unauthorized sources. Backend computer 223 may beconfigured as a communication server for the trader stations 230. Hub240 handles communications between backend computer 223 and traderstations 230.

In the embodiment shown in FIG. 7, trader site 200 is connected to afirst exchange site 100 and a second exchange site 700. Of course, othernetwork arrangements may be used in connection with the presentinvention. Through the first exchange site 100, the trader site 200 mayreceive market information and trade securities, such as options,futures, and other derivatives; currencies, stocks, bonds, and otherphysicals like corn, metals, electricity, etc., and/or other items.Through the second exchange site 700, the trader site 200 may receivemarket information and/or trade securities (e.g., options, futures, andother derivatives; currencies, stocks, bonds, and other physicals likecorn, metals, electricity, etc.,) and/or other items. Traders site 200receives market information and trades securities or other items relatedto the securities or other items traded through the first exchange site100.

The trader site 200 may be equipped with an automatic hedging capabilitythat automatically buys or sells securities (e.g., futures, options,swaps or other derivatives; currencies, stocks, bonds, or otherphysicals like corn, precious metals, electricity, etc.) and/or otheritems traded on the exchange to hedge at least some of the risk (forexample, delta risk) associated with an automated trade for othersecurities or items. For example, trader site 200 may trade options fora particular stock through exchange site 100 and the particular stockthrough exchange site 700. In general, two types of orders may besubmitted to an exchange to buy (sell) a security. A market orderinstructs the exchange to buy (sell) a specified quantity of thesecurity at the going market price. A limit order instructs the exchangeto buy (sell) up to a specific quantity of the security if the marketprice is equal or better than a specified value. A trader usually can beassured that a market order will be filled by the exchange, but cannotbe certain of the price at which the order is filled. The actual pricethat the market order is filled depends on available price and depth ofmarket. While the trader placing a limit order can be assured of aprice, all or a portion of the limit order may never be filled if themarket price never meets the limit order conditions.

The principles of a market order and a limit order are illustrated bythe following examples.

Matched Market Order Market Order Against Price Quantity to Sell BidPrice Bid Amount Order? Best Available 1000 shares $110/share 400 sharesYes Market Prices $100/share 600 shares Yes  $80/share 2000 shares  No

The above table assumes a market with current bids of $110/share for 400shares, $100/share for 600 shares and $80/share for 2000 shares, asindicated above. A market order to sell 1000 shares will be executed bythe exchange at an average price of $104/share. In other words, the 1000share market order will be matched with 400 shares at $110/share and 600shares at $100/share, for a net of 1000 shares at an average price of$104/share.

If the bid of $110/share for 400 shares is sold just before the marketorder is received, the following market is presented.

Matched Market Order Market Order Against Price Quantity to Sell BidPrice Bid Amount Order? Best Available 1000 shares Not Market PricesAvailable $100/share  600 shares Yes  $80/share 2000 shares Yes

Because 400 shares at $110/share is no longer available, the exchangewill match the market order using 600 shares of the $100/share bid and400 shares of the $80/share bid, resulting in an average price of$92/share.

We next consider a similar scenario using limit orders instead of marketorders.

Matched Limit Order Market Order Against Price Quantity to Sell BidPrice Bid Amount Order? $100/share 1000 shares Not Available $100/share 600 shares Yes  $80/share 2000 shares No

Now assume that a limit order to sell 1000 shares at $100/share issubmitted instead of the market order and the $110/share bid has alreadybeen matched. The exchange will match 600 shares of the limit order at$100/share and will not match the remaining 400 shares because the$80/share bid is too low. Accordingly, the remaining 400 shares of thelimit order will stay in the exchange's book until a new matching orderto buy at $100/share or higher is received by the exchange, which maynever occur, or until it is cancelled.

As discussed above, order submission in the automated trading systemdepends, for example, on the price of the underlying security, which isliable to change frequently. Thus, if the automated trading system makesan option trade, the trader may wish to hedge the risk associated withunderlying price movement. This risk, commonly called delta risk, may bequantified using mathematical models. These models may be similar to, orthe same as, the models used for determining theoretical option pricesusing input variables (1)-(7) discussed above. The option lot size(shares per option contract) and number of option contracts traded aretypically factored into the hedging decision. The option lot size istypically defined by the options exchange when the contract is createdand changed only under special circumstances, such as capitaladjustments. The number of options that the trader has bought or sold isincluded in the confirmation notice transmitted from the optionsexchange. Accordingly, assuming a total delta hedge is desired, a tradermay determine the number of shares of the underlying security to bebought or sold after each option trade based on: (1) mathematicalmodels, including price of the underlying security, (2) options percontract and (3) number of options traded.

As noted above, the price of the underlying security may be defined inseveral different ways. A typical hedging response of an option tradewill be to buy or sell the is underlying security. Specifically, buying(selling) calls and selling (buying) puts will usually lead to selling(buying) the underlying for delta hedging. Since the trader will need tosell (buy) the underlying to hedge the delta risk, he may be mostinterested in the bid (ask) price of the underlying security. Whiledelta risk is referred to specifically, it should be understood that theautomated hedging feature might be used to hedge other known risks. Forexample, automated hedging may be used to hedge the vega risk, the riskof a position or trade due to price changes of the options arising fromchanges of an option's volatility.

From a trading perspective, the trader must define how and to whatextent to delta hedge. Obviously, a trader must first decide whether hewants to delta hedge manually, or automatically. In either case, he mustconsider two opposing dynamics: (1) speed of executing the underlyingsecurity orders, and (2) execution price of the underlying securityorders. Typically, a trader may choose to hedge using market orders ifshe is most concerned about speed of execution, or limit orders if sheis most concerned about the price at which the underlying orders areexecuted. As described above, entering a market order will (nearly)always result in the desired quantity being executed, but at potentiallyunfavorable or unexpected prices. Conversely, entering a limit orderwill always result in executed prices which meet certain criteria (i.e.,greater than or equal to limit price if selling, and less than or equalto the limit price if buying), but only some or none of the desiredquantity may actually be executed.

The trader may assess several qualitative factors in deciding whether toautomatically hedge and, if so, whether to use market orders or limitorders. Some of the qualitative factors include the quantity of deltahedge underlying trade relative to the depth of the entire underlyingmarket, volatility of the underlying market, the size of the underlyingbid-ask price spread relative to the price of the underlying, and theamount of mental attention the trader can give toward the delta hedgetrade. Different traders trading options on different underlyingsecurities may opt for different hedging methods. Thus, in oneembodiment of the automatic option trading system of the presentinvention, the trader may choose manual hedging, automatic hedging usingmarket orders, or automatic hedging using limit orders.

The automatic hedging software may be resident on one or more of thetrader stations 230, a backend computer 220, 223, 225, or otherequipment of the trader site 200. One embodiment of the automatedhedging system will be described in connection with FIG. 7. Backendcomputer 220 receives option trade confirmations from exchange site 100based on an order submitted automatically by backend computer 225.Alternatively, or in addition, backend computer 225 may receive optiontrade confirmations from the exchange site 100. Further, the optiontrade confirmations may correspond to orders submitted eitherautomatically or manually by a trader. Backend computer 220 routes thetrade confirmation to a trader station 230 that is associated with theautomatic option trade made by the backend computer 225.

If a manual hedge feature has been selected, trader station 230 displaysthe appropriate hedge action based on factors previously entered by thetrader. For example, the trader may see a message such as “buy 4500shares” of the underlying security. If automatic hedging using themarket order has been selected, trader station 230 automatically submitsa market order, for example to buy 4500 shares at the market prices, toexchange site 700 via backend computer 223. At the exchange site 700,the market order will (nearly) always be immediately filled by buying4500 shares, albeit at a potentially unexpected or undesirable averageprice for those shares.

If automatic hedging using a limit order has been selected, traderstation 230 automatically submits an order, for example to buy 4500shares at a price of 68.05, to exchange site 700 via backend computer223. The specific limit price submitted depends on the currentunderlying market and trader definable (a priori) as, perhaps, either:(1) current ask price, since she is buying, (2) average of current bidand ask price, or (3) last traded price. Depending on the marketconditions, exchange site 700 may not be able to match the limit orderimmediately, if ever. Exchanges typically enable the trader to modify ordelete partially matched or completely unmatched limit orders. In somecases, the exchange site through which the underlying security is tradedmay depend on the option traded. For example, both futures of an equityindex (e.g. Standard and Poor's 500) and options on the same equityindex may be traded through exchange site 100. A stock may be tradedthrough exchange site 700, but options for the stock may be tradedthrough exchange site 100. In such a case, the system configurations ateither the trader station 230 performing hedging or other equipment attrader site 200 must ensure that hedge orders are routed to theappropriate exchange.

While the above-embodiments have been described in terms of look-uparrays or tables, it should be understood that data may include or bemaintained in other organizational memory constructs consistent with thepresent invention, for example, linked lists, trees, heaps, hash lists,or some combination, or any other data structure or combinations of datastructures useful in implementing a search algorithm. In addition, thetrader site 200 is described as submitting orders to the exchange site100 using the automated trading system. However, the trader site 200 maysubmit its “order” in the form of a quote to the exchange site, wherethe bid (ask) price of the quote corresponds to the theoretical buy(sell) price if, say, the trader wanted to buy (sell) the item.

It will be apparent to those skilled in the art that variousmodifications and variations can be made without departing from thescope or spirit of the invention. For example, the present invention maybe applied in areas other than electronic securities, for example, thepurchase and/or sale of goods or services, contests, auctions, and otherapplications in which fast, accurate responses are desirable. Otherembodiments of the invention will be apparent to those skilled in theart from consideration of the specification and practice of theinvention disclosed herein. It is intended that the specification andexamples be considered as exemplary only, with a true scope and spiritof the invention being indicated by the following claim.

What is claimed is:
 1. An automated trading system for use in anelectronic exchange system network, comprising: a receiver interface inelectronic communication with an electronic exchange system network, thereceiver interface receiving electronic signals indicative of an optionprice of a option traded on the electronic exchange system network; adata processor that (1) generates an option threshold value for theoption using at least price information for one or more securitiesunderlying the option, (2) automatically compares the option thresholdvalue to the option price, and (3) automatically determines, based onthe result of the automatic comparison, whether one or more transactionrequest criteria are satisfied; and an output interface outputting atransaction request for the option to the electronic exchange systemnetwork within 150 milliseconds of receiving the electronic signals ifthe one or more transaction request criteria are satisfied.
 2. Thesystem of claim 1, wherein the option threshold value is a sell valuerepresenting a current desired price for selling the option by theautomated trading system.
 3. The system of claim 2, wherein the sellvalue includes a spread value adjustable by a user.
 4. The system ofclaim 1, wherein the transaction request criteria include a pricecondition that is satisfied if the option threshold value is less thanthe option price.
 5. The system of claim 4, wherein the transactionrequest is a sell order for the option.
 6. The system of claim 5,wherein the sell order is a sell order for the option at a price equalto or less than the option price.
 7. The system of claim 5, wherein thesell order is a price quote including a sell price equal to or less thanthe option price.
 8. The system of claim 1, wherein the option thresholdvalue is a buy value representing a current desired price for buying theoption by the automated trading system.
 9. The system of claim 8,wherein the buy value includes a spread value adjustable by a user. 10.The system of claim 1, wherein the transaction request criteria includea price condition that is satisfied if the option threshold value isgreater than the option price.
 11. The system of claim 10, wherein thetransaction request is a buy order for the option.
 12. The system ofclaim 11, wherein the transaction request is a buy order for the optionat a price matching the option price.
 13. The system of claim 11,wherein the buy order is a buy order for the option at a price equal toor greater than to the option price.
 14. The system of claim 11, whereinthe buy order is a price quote including a buy price equal to or greaterthan the option price.
 15. The system of claim 1, wherein the receiverinterface is in electronic communication with a communication network ofthe electronic exchange system network.
 16. The system of claim 1,further comprising a memory, wherein the price information of the one ormore securities underlying the option is stored in the memory.
 17. Thesystem of claim 1, further comprising a memory, wherein the priceinformation of the one or more securities underlying the option isstored in a look-up table in the memory.
 18. The system of claim 1,further comprising the receiver interface receiving price information ofthe one or more securities underlying the option.
 19. The system ofclaim 18, wherein the price information is received from an updatingmarket feed.
 20. The system of claim 1, wherein the data processorperforms at least one check before the output interface outputs thetransaction request.
 21. The system of claim 1, wherein one of the oneor more transaction request criteria is a safety condition.
 22. Thesystem of claim 21, wherein the safety condition is a maximum number oftrades within a predetermined time period.
 23. The system of claim 21,wherein the safety condition is a maximum quantity of the option. 24.The system of claim 1, further comprising a user input device andmemory, wherein the user input device enables a user to enter a spreadvalue, said memory stores the spread value, and said data processorgenerates the option threshold value using the spread value stored inmemory.
 25. The system of claim 1, wherein the option threshold value isderived from multiple factors, and a user input device enables a user toadjust one or more of the factors, thereby changing the option thresholdvalue.
 26. An automated trading system for use in an electronic exchangesystem network, comprising: a receiver interface in electroniccommunication with an electronic exchange system network, the receiverinterface receiving electronic signals indicative of an option price ofa option traded on the electronic exchange system network, and receivingelectronic confirmations of a successful trades; a data processor that(1) generates an option threshold value for the option using at leastprice information for one or more securities underlying the option, (2)automatically compares the option threshold value to the option price,and (3) automatically determines, based on the result of the automaticcomparison, whether one or more transaction request criteria aresatisfied; and an output interface outputting a transaction request forthe option to the electronic exchange system network within 150milliseconds of receiving the electronic signals if the one or moretransaction request criteria are satisfied, and outputting a hedge orderfor a security in response to receiving an electronic confirmation of asuccessful trade based on the transaction request.
 27. The system ofclaim 26, wherein the hedge order hedges at least some of the riskassociated with the transaction request.
 28. The system of claim 27,wherein the hedge order hedges at least some of the delta riskassociated with the transaction request.
 29. The system of claim 27,wherein the hedge order hedges at least some of the vega risk associatedwith the transaction request.
 30. The system of claim 26, wherein thehedge order is a market order.
 31. The system of claim 26, wherein thehedge order is a limit order.
 32. The system of claim 26, wherein thehedge order is an order for at least one of the one or more securitiesunderlying the option.
 33. The system of claim 26, wherein the hedgeorder is an order for an option.
 34. The system of claim 26, wherein thehedge order is output for execution on an exchange different than theelectronic exchange system network.
 35. The system of claim 26, whereina type of the hedge order is selectable by a user through a user inputdevice that communicates electronically with the automated tradingsystem.
 36. The system of claim 35, wherein the type of the hedge orderis a market order for at least one of the one or more securitiesunderlying the option or a limit order for at least one of the one ormore securities underlying the option.
 37. The system of claim 26,wherein the option threshold value is derived from multiple factors. 38.The system of claim 37, wherein one of the multiple factors isvolatility.
 39. The system of claim 37, wherein one of the multiplefactors is an interest rate.
 40. The system of claim 37, wherein one ofthe multiple factors is a dividend stream of at least one of the one ormore securities underlying the option.
 41. The system of claim 37,wherein the option threshold value is re-derived when one of the factorschanges.
 42. The system of claim 37, wherein at least one of the factorsis adjustable by a trader through a user input device.
 43. The system ofclaim 26, wherein the option threshold value is adjustable by a traderthrough a user input device that communicates electronically with thedata processor.
 44. The system of claim 43, wherein the option thresholdvalue is derived from a theoretical price value and a spread value, andthe user input device enables a trader to adjust the spread value,thereby changing the threshold value.
 45. The system of claim 44,wherein the user input device enables a trader to adjust spread valuesfor multiple derivative securities simultaneously, thereby changing theoption threshold values for the multiple derivative securities.
 46. Thesystem of claim 43, wherein the data processor is located closer to theelectronic exchange system network than the user input device.
 47. Thesystem of claim 43, wherein the data processor is located substantiallycloser than the user input device to the electronic exchange systemnetwork.
 48. The system of claim 26, wherein the data processor islocated near the electronic exchange system network.
 49. The system ofclaim 26, wherein the data processor is located in the same city as theelectronic exchange system network.
 50. The system of claim 25, whereinthe data processor is located in a different city than the electronicexchange system network.